Australia’s Central Bank Cuts Growth, Inflation Forecasts

RBA’s Grim Outlook Makes Room for Further Interest-Rate Cuts

SYDNEY—Australia’s central bank Friday lowered its forecasts for inflation and economic growth, saying the economy won’t grow fast enough in the next year to prevent a further rise in unemployment.

The Reserve Bank of Australia now expects gross domestic product growth between 2.25% to 3.25% through 2015, down a quarter percentage point from its November outlook. Inflation is forecast between 2% to 3% for the same period, compared with a prior view of 2.5% to 3.5%.

In a quarterly statement, the RBA said there had been scant evidence of a broad-based recovery in the domestic economy, despite a lengthy period of low rates. Falling global crude-oil prices has muted inflation, and a weak job market will continue contain wage growth.

The grim outlook makes room for the Reserve Bank of Australia to further cut interest rates, staying in step with other central banks that have moved to ease policy settings in the past month.

The RBA cut interest rates by one quarter of a percentage point Tuesday to a record low 2.25%, its first cut since August 2013, citing falling global interest rates.

Financial markets are betting the RBA will cut interest rates at least one more time by mid-2015, with some market participants expecting it will continue cutting in the second half of the year.

The RBA said GDP growth is expect to remain weak through 2015, tracking below 3.0%, a rate often cited as needed to prevent unemployment from rising. Already at its highest levels in a decade, unemployment is expected to “rise a little further and peak a little earlier than anticipated.”

Still, the central bank’s outlook for 2016 and 2017 was a bit rosier. The RBA said it expects growth to recover solidly over that period, as low interest rates and falling fuel costs support business activity. Falling oil prices will continue to push inflation lower, cutting around 0.5 percentage points from consumer inflation in the first quarter of 2015, the RBA said.

Australia’s core inflation rate, which strips out volatile food and energy costs, is expected to remain within the desired 2% to 3% target band through mid-2017.

Despite big falls since mid-2014 against the U.S. dollar, the slide in the Australian dollar has failed to keep pace with falling export prices, the RBA said. A weaker currency would make Australia’s exports more competitive overseas. The Australian dollar has fallen from around US$0.9500 to US$0.7800 since mid-2014, and last traded at US$0.7822.

The Australia economy, which has avoided recession for 23 years, was among the few to emerge from the global financial crisis largely unscathed, thanks to industrializing China’s thirst for the nation’s abundant raw materials. But as China’s growth engine cools, Australia’s resource-driven economy has struggled. China is Australia’s largest trading partner and the biggest buyer of the country’s top export, iron ore, a key steelmaking ingredient. Iron ore prices have plunged by some 50% last year.